Determinants of Financial Distress in Deposit-Taking Savings and Credit Cooperative Organizations in Kenya

Abstract

Deposit-taking saving and credit cooperative organizations in Kenya are failing with depositors’ funds and worsening the poverty level among the co-operators who are members of the deposit-taking SACCOs. The widespread failure of DT SACCOs in Kenya is likely to lead to a loss of confidence among the current and potential members of the DT SACCOs in Kenya and eventually threaten to kill the sector. Past studies on determinants of financial distress in SACCOs have been inconclusive about the determinants and hence the need for the current study. The study was guided by the following objectives; to examine the effect of related party transactions on financial distress in DT-SACCOs in Kenya; to determine the effect of interest rate spread on financial distress in DT-SACCOs in Kenya; to establish the effect of non-performing loans on financial distress in DT-SACCOs in Kenya; to assess the moderation effect of firm size on the relationship between the determinants and financial distress in savings and credit cooperative organizations in Kenya; to assess the moderation effect of amendments on the determinants of financial distress in DT-SACCO s in Kenya. The study adopted the following theories as the basis for analyzing the collected data; wrecker’s financial distress theories, Keynes Liquidity Theory, Information Asymmetric Theory, Neoclassical Theory, and Agency theory. The study was based on the relationship between the independent variables, dependent variables, and moderating variables. The study sought to establish the effect of related party transactions, interest rate spread, and non-performing loans on the financial distress of deposit-taking SACCOs in Kenya. The study adopted a positivist research philosophy and descriptive research design. The target population was 176 DT-SACCOs in Kenya, that is 164 duly registered DT-SACCOs and 12 with restricted licenses between 2013-2020, individual deposit-taking SACCOs in Kenya under study (Source: SASRA Annual Report, 2022). Secondary data was obtained from SACCOs records as published by SASRA. The study used a systematic sampling technique to obtain the appropriate sample size of 68 DT SACCOs. Data were analyzed using STATA computer software. Data collection covered nine (9) a year from 2013 to 2020, this period of seven years was selected for the study because SASRA 2016 amendment bill was enacted in 2016 therefore the justification for the choice of the study period is 3 years before the Act was amended and 4 years after SASRA Act amendment bill. Multivariate panel regression approaches were used to test hypotheses and link the variables. The study established that related party transactions, interest rate spread, and non-performing loans had a significant effect on financial distress in DT SACCOs in Kenya. The implications of the findings are that; In terms of policy, DT- SACCO societies should invest more in government securities to secure the societies’ liquidity. SASRA should re-look at loan provision and securities including interest spread policy to make the SACCOs protect the loans as a means of reducing non-performing loans. The government through SASRA should enact strict amendments to directors borrowing from SACCOs. In practice, The SACCO societies should carry out thorough loan appraisal procedures to determine repayment before the loans are awarded to clients.